Biz Chapter 9

Finance

- The functional area of business that is concerned with finding the best sources and uses of financial capital - the study of how to obtain and allocate a limited resource, money!

A _____ is used to develop a forecast of net income for the planning period of the firm. a. budgeted income statement b. estimated cash budget c. budgeted balance sheet d. profit and loss statement

A

Which of the following is a disadvantage of debt financing? A. The firm is required to make fixed payments to the creditors. B. Interest payments on debts are tax-deductible. C. Additional funds can be acquired without requiring existing stock holders to invest more of their money. D. Using debt can increase the return on equity to owners during periods of strong earnings.

A

At a local convenience store, an increase in the inventory turnover ratio would indicate that it is: a. at risk of holding too much inventory b. selling out its merchandise quickly c. relying heavily on credit sales d. more likely to face a cash flow problem

B

Projects with a negative net present value should be: a. rejected as it does not take the time value of money into account. b. rejected since the expected future cash flows from the project are less than the cost of the investment. c. accepted since the net present value does not alter the company's capital budgeting. d. accepted since the expected future cash flows from the project exceed the cost of the investment.

B

Which of the following statements is true about cash budgets? A. They project cash surpluses but do not project cash shortages. B. They are used by financial managers to get a better understanding of the timing of cash flows within the planning period. C. They show projected cash inflows and outflows for each year over a ten-year period. D. They are seldom important because all firms experience even cash inflows and outflows over the course of a year.

B

You have recently been asked to leave your current job with a large company so you can run your family business. Many members of your family will rely on that business to pay their bills for the next few years. The company has grown over the past decade and has taken on a significant amount of short-term debt. Your banker paid you a visit to discuss her calculations of various ratios for your business. The banker's primary concern is whether you'll have the ability to stay current with short-term debt payments, so she's most likely to focus on your A. Profitability ratios B. Liquidity ratios C. Leverage ratios D. COGS ratios

B

In financial management, risk is referred to as: A. the environmental factors that may affect a business adversely. B. the internal factors that may disrupt the smooth functioning of a company. C. the degree of uncertainty about the actual outcome of a decision. D. the various strategies implemented by managers to increase returns.

C

Maurio Pena, a petroleum company, needs to pay $2 million to Zaiten Inc. Maurio Pena sells its old assets to another company and obtains enough money to pay its debt. In this scenario, Maurio Pena's ability to sell its old assets to another company in order to pay its debt to Zaiten is measured by analyzing _____. a. leverage ratios b. asset management ratios c. liquidity ratios d. profitability ratios

C

The _____ measures the extent to which a firm relies on debt to meet its financing needs. A. liquidity ratio B. activity ratio C. leverage ratio D. profitability ratio

C

Liquidity Ratio

Current Ratio The company's ability to convert assets to cash and pay its short-term debts. Goal to measure how quickly can you convert to cash with little risk of loss. Currents Assets (balance sheet)/ Current Liabilities (balance sheet)

Financial managers use__________to assess the financial strengths and weaknesses of their firm. A. financial leverage B. value stream mapping C. cost accounting D. financial ratio analysis

D

Trumen House, a confectionary manufacturing company, orders its raw materials in bulk from Nesinbon. Nesinbon allows Trumen House to make the payment at a later date, as opposed to immediate payment. Which of the following short-term financing options is being offered by Nesinbon? A. Short-term bank loans B. Commercial paper C. Factoring D. Trade credit

D

Leverage Ratio

Debt/ Worth Ratios that measure the extent to which a firm relies on debt financing in its capital structure Total Liabilities/ Stockholder's Equity (balance sheet)

Financial managers should focus solely on meeting the financial needs of their firms in the short run, leaving the long-term financial issues to the top management. True or False

False

John bought some common stock in McKelly Inc. last year. The company has just reported record earnings. This means John is guaranteed to receive an increase in his dividend this year.

False

Pro forma statements are idealized financial statements that show the firm's average financial performance over the past 10 years. a. True b. False

False

The time value of money is the principle that a dollar received today is worth less than a dollar received in the future. A. True B. False

False

Debt Financing

Funds provided by lenders (creditors)

Profitability Ratio

Net Profit Margin How effectively the company uses its resources to generate profits. Goal to measure the rate of return a firm earns on various measures of investments. Net Income or Earnings/ Sales (Income statement)

long terms bank loans

Term loans calls for regular schedule of fixed payments of principal and interest over specific period of time. (3-5-7-10) years or for buildings 15 years. A legal and binding agreement. Banks usually require collateral to support their risk. If the borrower can not meet the agreement, the bank can use the collateral to repay what is owed.

Present Value

The amount of money that if invested today at a given rate of interest (called the discount rate), would grow to become some future amount in a specified number of time periods

A money market mutual fund is a mutual fund that pools funds from many investors and uses the funds to purchase highly liquid, short-term securities.

True

Rule of 72

a concept of time value of money Double your money by dividing the annual interest rate (in percent) into 72.... Example: 8% annual return verses 4% return 72/8 = 9 years or 72/4 = 18 years

cash budget

a detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash

Line of Credit

a financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating.

Asset management ratio

aka activity ratios financial ratios that measure how effectively a firm is using its assets to generate revenues or cash

pro forma balance sheet

aka budgeted balance sheet a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets

Pro Forma

aka budgeted income statement a projection showing how a firm's budgeted sales and costs will affect expected net income

Liquid asset

an asset that can quickly be converted into cash with little risk of loss

Valuation

an estimation of something's worth, especially one carried out by a professional appraiser.

Financial Ratio Analysis

computing ratios that compare values of key accounts listed on a firm's financial statements

Equity Financing

funds provided by the owners of a company

Cash Management

is the corporate process of collecting and managing cash, as well as using it for (short-term) investing. It is a key component of ensuring a company's financial stability and solvency.

Capital Budgeting

process a firm uses to evaluate long-term investment proposals.

Internal Rate of Return (IRR)

rate of return that sets the net present value of all cash flows (both positive and negative) from the investment equal to zero.

Cash Equivalents

safe and highly liquid assets that many firms list with their cash holdings on their balance sheet

Short-term

short-term: Short-term is typically 30-60-90 days with a maximum of one year to pay back full amount. Typically known as Lines of Credit; bank pre-approved specific limit $

Trade Credit

spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment

Working Capital

the capital of a business that is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.

Risk

the degree of uncertainty regarding the outcome of a decision

Financial Capital

the funds a firm uses to acquire its assets and finance its operations

Capital Structure

the mix of equity and debt financing a firm uses to meet its permanent financing needs

Time Value of Money (TVM)

the principle that a dollar received today is worth more than a dollar received in the future

Net Present Value (NPV)

the sum of the present values of expected future cash flows from an investment, minus the cost of that investment

Financial Leverage

the use of debt in a firm's capital structure

Covenants are terms included in long-term loan agreements that are intended to protect creditors by preventing borrowers from engaging in activities that may undermine their ability to repay the loan A. True B. False

true